Listen to the full episode, here.
John Norris (00:29):
Okay. Well, hello again, everybody. This is John Norris at Trade and Perspectives. As always, we have a good friend, Sam Clement. Sam, say hello.
Sam Clement (00:35):
John, how are you doing?
John Norris (00:36):
Sam, I’m doing fantastically and I hope you are.
Sam Clement (00:38):
I am doing great.
John Norris (00:39):
All right. Sam, that’s good to hear. The topic for this week’s podcast, the topic for this week’s Trading Perspectives is something about the normalization of debt. Matter of fact, I think the title of it is, I think we’re going to call it the Normalization of Debt isn’t normal. What do you think about that?
Sam Clement (00:55):
It is and it isn’t normal. I mean, after a certain point, it starts to become the norm, I guess.
John Norris (01:00):
Well, I guess you’re probably right about that. But one of our coworkers who shall remain nameless, fellow associates, I guess you could say, brought up this topic for discussion and wanted our thoughts on it. I mean, is debt, since it’s become so embedded and normalized, even encouraged? She wondered whether or not people aren’t just taking out loans for, not just for big things anymore, but financing everything because you can. And I would say Sam, at first glance and just walking around the earth for a long period of time, I would say that while she might not believe it, this is nothing terribly new.
Sam Clement (01:38):
Debt is literally in the Bible. So debt and being beholden to the lender is not necessarily a new concept by any means.
John Norris (01:47):
And so I know that both you and I pulled similar type data, maybe from different sources. I went to the Federal Reserve. I think you went to. Where did you go? That’s
Sam Clement (01:56):
The Fed.
John Norris (01:56):
You went to the Fed, maybe different debt. It just looks a little bit different. I’m staring at Sam’s spreadsheets and he’s not really staring at mine, but they’re right there in case you wanted to take a look at it. And you can go all the way back to about the 2003 or thereabouts, at least on the Fed’s website, and find out just the breakdown of just overall household debt going back then. And not surprisingly, historically mortgages have made up a pretty good chunk of it. As have home equity revolving lines of credit, then you have auto loans, credit cards, student loans, and then the somewhat nebulous other, just things that don’t fit neatly into those first five categories. And one of the things that I’m struck at, looking at just historical levels of debt and taking a look at credit cards, taking a look at everything, auto loans is really the explosion, not just in credit card, but in student loan debt.
(02:51):
And so when I take a look at that, I go, golly, you take a look at credit card, take a look at student loans, this is stuff that you’ve either already consumed or it’s immediately consumable ordinarily. Whereas I take a look at mortgages, I take a look at home equity, revolving lines of credit, take a look at auto loans. You’re taking out debt for that type of stuff and you’re putting something on the balance sheet or you are attaching or otherwise tapping into your equity in something. So that’s a use of your own equity. So I take a look at those three kind of a little bit differently than I do credit card and student loans. Now we could argue all day long that people are putting durable goods on their credit cards or investments or some other forms of assets. I would say that’s generally not been the case in my house.
(03:36):
It’s generally been just, I mean, maybe tires or durable goods are just like getting your car fixed. I mean stuff that just, oh my God, I wasn’t expecting it this month. But saying credit card debt as a percentage of overall household debt seems to be kind of sticky in the five to 7%. But the numbers are getting really massive according to the numbers that I have. Take a look at credit card debt in the United States, at least according to the Federal Reserve, at least according to the table that’ll pull it off. At the end of the second quarter of this year, credit card debt was something like $1.26 trillion. Auto loans were 1.71 trillion. Student loans were 1.65 trillion. Now focusing really on the credit card or the student loan, we’re looking at about $3 trillion. You add the two together in that’s on balance sheets around for something that has probably already been consumed or is getting ready to be fully consumed.
(04:33):
For all intents and purposes, something that’s not an asset on your balance sheet. And as a result, I would say that right there is more of an anchor on the economy, more an anchor on the household than mortgages.
Sam Clement (04:46):
Sure. Yeah. I mean, well, first off, mortgages are typically a 30-year loan, right? Yeah. So it’s like when you’re going back to 2020 to 2026, a large chunk of those are the same loans that were on the books. Could be. Yeah, sure. 2020 versus 2026. So you’re not seeing that massive when we talk about rate changes and what have you. It’s not the whole book of 70% of the debt being mortgages repricing from three and a half to seven and a half percent. So that’s obviously a much slower moving thing and rates are less sensitive to the book of mortgages as a whole. Auto loans, less so. Credit cards, definitely less so. So that’s where we’ve talked about rates going up and the impact. It’s the auto loans, it’s even home equity loans, credit cards, student loans, things like that, that reprice almost immediately oftentimes or in a much quicker, if a car loan’s three to six years.
John Norris (05:45):
Yeah. I mean, you’re absolutely spot on. So while I’m taking a look at the absolute levels of data and I’m seeing to just kind of the way the debt has grown over the years, I’m going, okay, maybe that’s not as horrific as she thought it might’ve been. The numbers are within a decent variance of economic growth plus inflation. I mean, it’s about like that. It’s not horrible. It doesn’t bespeak of the people just loading up credit card debt. I mean, I’m just going to run the numbers out. At the end of the second quarter of this year, mortgages made up about 70% of total debt balances. HELOC’s about 2.4%. Auto loans 9.1%. Student loans, 8.8%, other 3%, and then credit cards 6.7%. Five, six years ago, that number was around six, 6.2. So okay, it’s up a little bit, but what you touched on there was interest rates.
(06:47):
In 2000, I guess in 2000, 2001, if I remember correctly, the overnet lending target was as low as what, 25 basis points? That means prime was well, 325.
(06:59):
And a lot of credit cards will reprice off of some floating rate index, oftentimes prime. So make no mistaking about it. All those people that have revolving debt that have floated off prime over the last five years have seen their absolute levels of interest rates go up at least 3%. And so as a result, while debt hasn’t necessarily exploded in a lot of ways for those people with revolving debt or taking out new loans, the debt service has gone up significantly.
Sam Clement (07:30):
Yeah. I mean, we’ve talked about auto loans before and car prices and back to COVID and the amount of people that are spending $1,000 plus a month on car payments has gone up. And the amount of people over $500, $750, $1000 has all gone up.
John Norris (07:47):
My personal take is if you’re spending $1,000 on a car note, you might want to rethink with the car you’re getting.
Sam Clement (07:52):
And it’s also, it’s a combination of inflation and car prices going up as well as rates going up. And it’s really a double whammy for those kinds of purchases, whether it’s cars, whether it’s just general credit card purchases, whether it’s student loans. We’ve talked about education prices going up. So not only have the prices of really those three categories, what you’re buying has gone up, the financing has gone up. And especially on the auto loan side, because a lot of these credit cards, if you’re actually paying interest, if it went from 21% to 24%, that’s percentage – It’s
John Norris (08:28):
So hard. Scrooge McDuck.
Sam Clement (08:30):
I’m saying you’re already paying so much. It’s not like it’s these car loans that were one and 2% and now are six, 7% where it’s like triple the interest rate. It’s a percentage of it. So that’s a big chunk of what I look at. And anytime when we, I mentioned this when we’ve talked about the federal government debt, what have you, you have to look at both numerator and denominator for whatever kind of equation you want to look at. And it’s how much have the assets gone up as well? And it’s amazing. I pulled this from the Federal Reserve. It’s a balance sheet of households and nonprofit organizations. The total assets were in the first quarter of 26 were $204 trillion.
John Norris (09:10):
That’s a lot.
Sam Clement (09:10):
The total liabilities were 21 and a half trillion. So that right there makes it sound like we’ve got a healthy balance sheet.
(09:16):
Exactly. You look at it as a whole and it’s really not, that does not appear to be too bad.
John Norris (09:23):
Household debt as a percentage of overall household wealth is not a problem in the country in aggregate. That’s what you’re saying.
Sam Clement (09:29):
And that’s the big caveat is in aggregate because the other data I pulled was breaking it down.
John Norris (09:34):
Musk makes up a trillion of that. He makes a 5% of that.
Sam Clement (09:37):
That. Yeah. And so again, yes. I mean, you’re joking, but you’re right that when you break it down by the category, they do it by the top 0.1% and then the 1%, then 10%, and then the 50 to 90% and then the bottom 50 category. The bottom 50% has over $6 trillion in liabilities.
John Norris (09:55):
Well, what’s their balance sheet there? $6 trillion in liability.
Sam Clement (09:58):
It’s very little. It’s barely above break even. Where the top –
John Norris (10:03):
So it’s about 100%.
Sam Clement (10:04):
Yeah. The top 0.1% has less than a quarter trillion of liabilities.
John Norris (10:09):
It doesn’t make any sense.
Sam Clement (10:11):
It’s 24 times what. And again, that’s 0.1%.
John Norris (10:17):
I guess if you have that much, you’ll just pay off your debt.
Sam Clement (10:19):
Yeah. But even the top 1% is barely combined, just barely over one trillion. And those are also the type of liabilities that the top 1% are taking out are much typically better, I would say, liabilities. It’s what they call good debt.
John Norris (10:33):
In my experience, when people that have that amount of wealth are taking out debt, they’re generally doing it for investment purposes or real estate or private deals or something
Sam Clement (10:43):
Along those lines. Low rate mortgages, security backed lines of credit, stuff. It’s kind of considered good debt historically. And if you go from the bottom 50 to the 50, 90, that’s six trillion and almost $9 trillion between the two of them. So the bottom 90% is by far the vast majority of the liabilities. And so that’s where I think you got to paint the picture of when debt is a problem. It’s not just this, you can’t look at it as a whole country.
John Norris (11:11):
Well, people that do what we do for a living sometimes are prone to do that.
Sam Clement (11:15):
Yeah.
John Norris (11:15):
Take a look at the black and white and go, okay, it’s a problem. I don’t see any problem.
Sam Clement (11:19):
Yeah. And we talked about it with the government debt as well as it’s like, yeah, we have massive amounts of debt and it’s growing every day, but we also have massive amount of assets. And so it’s a problem, but it’s not a problem maybe yet. And so that’s where I think you have to get into it a little bit more. And that goes back to your point of what type of debt is being taken out. Auto loans are not the type of debt that the top 1% historically is taking out. No. Credit card debt is definitely not what the top 1% is taking out. Student loans, typically not either. It’s really that mortgage category is going to be the big chunk of it. And then home equity lines, if they really think. So you got to –
John Norris (11:57):
So unfortunately, as is always the case, the people that have been getting, well, I mean, stymied, the shaft or whatever you want to call it from higher debt services are those people that can ill afford to pay it the most.
Sam Clement (12:08):
Right.
John Norris (12:10):
All right. Well, thank you all very much. Kind of laughing about that, but that does definitely seem to be the case. And then obviously increase in interest rates does put the whammy on it. And I guess we could really talk about this all day long in terms of who’s getting the short end of the stick. And I think we’ll all agree. I think we’ll agree upon it. People that are renting, they don’t have the household mortgage, people who are renting and then have credit card debts, student loan debts and auto loans. They’ve got none of the good debt and all of the bad debt, right?
Sam Clement (12:40):
Yeah. And we know this. I mean, we know lower end consumers spend pretty much all of their income and it starts to be on non-discretionary purchases the further down you go. And that’s just intuitive, right? The less money you have, the more of your budget is going to go to the things you have to buy.
John Norris (12:56):
Yeah. And so I mean, we take a look at all this and particularly let’s talk about people your age and younger. You’re a Y or a Z or which one are you?
Sam Clement (13:03):
It’s kind of in between.
John Norris (13:04):
But you’re not that, whatever’s coming up next, whatever their names are. The point that our friend, our coworker asked about is, do we see troubling signs with younger generations just all in this age of influencers on social media that people feel pressure to have certain things and to frankly live up with the Joneses or live up with whatever the influencer’s name? Is this really kind of a newfound trend or has this been around for a while? And I got to tell you, Sam, the temptation and the pressure to live beyond your means, I don’t care what the technology is, has always been there.
Sam Clement (13:43):
It’s always been there. In my opinion, has gotten worse with social media because you see more of it. The Joneses are no longer your. The Joneses were always your neighbors that live next door. That’s what you saw.
John Norris (13:55):
And when you’re driving a Chevrolet and they peel up in a Cadillac or Buick, then you know something’s going on.
Sam Clement (14:02):
Yeah. Well, now you see that for everybody you even kind of know because you follow them on social media and what have you. So I do think it’s gotten worse from that aspect. I also think it’s gotten worse because people don’t fully understand other people’s finances. And with the amount of wealth being passed on, that is often ignored with why people are spending money the way they are. And you see it all the time. You say, “Hey, I know what they do for a living. I know about what they make. There’s no way they can afford that.”
John Norris (14:31):
I still say that.
Sam Clement (14:32):
Yeah. Everyone has though that before. Of course. You see more of it with social media. And with money being passed down and going to continue to be passed down, you get more of that that doesn’t seem to line up. And that pushes people to try and keep up with someone who’s playing an entirely different game than they are. Unknowingly.
John Norris (14:53):
It’s very wise because I’m just going to use this as sort of a story. It’s almost an aside. I don’t know. But last Friday night, Beth and I went out with another couple of close friends of ours who went to a restaurant downtown on Morris Avenue who shall remain nameless for the purposes of this podcast. It’s not the most expensive restaurant in town, but it’s not fast casual. It’s not a firm bar. And it’s not someplace where I go casually. I mean, it’s casual, but I don’t go there just, okay, I’ll just go for dinner. And I noticed the table behind us was four young women, appear to be much younger than you. And you’re what? 30? 30. I was going to say 31 in February, right? Something like that. Close March.
Sam Clement (15:39):
March.
John Norris (15:39):
There you go. I know. Yes, I know you well. But I noticed that they seem to be maybe a year or two out of college. That’s what I would have guessed. But the older I get, the worse I am at guessing people’s ages. And this would not have been a restaurant when I was that age. I would have even thought that I’ve even pretended to go to just to go out to dinner. And of course, what you were talking about, you can’t judge someone else’s finance just by eyeballing them. I don’t know what the occasion was. I don’t know these girls’ finances. I don’t know anything, but I do know that type of restaurant was not in my norm when I was growing up. And so people that get to a certain age, get to a certain color of hair as I’ve gotten, do tend to maybe take a look at people younger, your age and younger, and see how it appears as though they spend money differently than how we did.
(16:31):
And I wonder if that’s sort of maybe a generational thing. And if that generational thing has more to do with social media or just due to the fact that frankly, they are more options now than there were when I was coming along. And so I’m saying I never would have gone to X, Y, Z restaurant back then. Well, it didn’t exist. And there weren’t that many types of restaurants. So how much of that do you think is coming?
Sam Clement (16:54):
I think it’s all of it. I think it’s social media. I think it’s changing consumer habits for younger generations and what they value as a whole. And maybe that’s social media, maybe that’s a separate thing. I also think COVID changed so much of it. I mean, we talked about the change from goods to services and experiences after that. And so you have this combination of people who are, especially if they’re hitting the labor market post – COVID or were in college during COVID, they come out of it, they start to have money. They value things that previous generations didn’t as much. They’re also keeping up with other people on social media and it’s the things they value and they don’t value things that maybe prior generations are necessarily savings or what have you. And so you have this culmination of different things that lead to just a vastly different consumer for younger generation.
John Norris (17:45):
You’re absolutely right about a vastly different consumer. And I’m not necessarily sure if this trend is all that healthy because let’s go back to my sort of a little story there about these young women in the restaurant. I think we’ll both agree that borrowing money and putting money on a credit card to go out to a nice restaurant is not maybe the most efficient use of debt. When I was coming along, and certainly my parents’ generation, keeping up with the Joneses generally meant while still conspicuous consumption of wealth, it was houses. Houses and it might have been nicer cars or something along those lines. I’m not saying all of it, but maybe a decent chunk of it, money was being plowed into things which potentially had some asset value, even jewelry, stuff like that. And I didn’t run the numbers on it, but I’m wondering whether or not the keeping up with the Joneses back in the day is a little bit different than the keeping up with the Joneses now.
(18:40):
And the keeping up with the Joneses now is a little bit more expensive on stuff that won’t appreciate in value and what that will mean for longer term health of balance sheets.
Sam Clement (18:47):
Look, I think a lot of it for younger people is trips. And part of that is social. I would say a large chunk of that is social media. One, you see certain people and we all know where it’s like, do they have a job? They’re traveling so much.
John Norris (19:00):
Without a doubt, because I know what my travel budget is and I see people who are significantly younger and going on what I would consider to be lavish trips. Not even staying in hostels. They’re staying at pretty nice hotels. And I’m going, how in the blue, what?
Sam Clement (19:17):
And the frequency of it too. And then you see it on social media. And then that’s something while amazing, I love traveling. You spend the money, it’s gone.
John Norris (19:26):
It’s gone. It’s a media with consent. I mean, so with
Sam Clement (19:30):
And left a foreign country. It’s not even cycling back into
John Norris (19:35):
The US economy. So do you think this assumption of debt that we’re doing for things like that, obviously it’s maybe not the most effective tool, even if you’re enjoying the consumption of your wealth at the time. Is it a parasitic dependency? I mean, is this a kind of a trap, a sort of a debt trap? People go out to try to impress other people on social media to keep up with the Joneses and unfortunately doing all this now is a little bit more expensive and we’re using the bad debt a little bit more. Does this cause what you’re doing today in order to post on Instagram or whatever the social media platform on which you are, that what you’re posting today could lead to debilitating household finances in the future?
Sam Clement (20:25):
I think it’s a little bit of both. I think when you’re in that bottom 50%, like we mentioned, some of that is debt that it’s just hard to survive without, unfortunately.
John Norris (20:37):
If you’re running tight and you have to put some money on a credit card to go to the grocery store, no one’s going to argue with you on that.
Sam Clement (20:44):
And that is a cycle that obviously high interest rates and that’s hard to get out. That 50 to 90% category though, that from Q1 of 2016 was less than six trillion and now is pushing close to nine. That by and large, I believe would be where you start to see that sort of unnecessary debt. Buying a nicer car than you can maybe afford and putting more on a loan. Borrowing money for a trip to keep up with the Joneses, that kind of thing. And so those are the two where you start to see significant amounts of debt. When you’re talking top 10%, it starts to be less meaningful, but it’s that bottom 50 and 50 to 90 where you see that kind of dependency or maybe different reasons.
John Norris (21:29):
There may be different reasons. One more thing before we got here today, and it could be actually of a nice topic for discussion later on. And what I’m noticing here is student loan debt. We all know that student loans have become just a massive amount of debt out there. And while it has been a while ago, a good while ago, when I graduated from college or the year before I graduated in college, I think I saw some debt in 1989 or thereabouts. The total size of federal student loan debt was something like $80 billion.
(22:01):
According to the Federal Reserve, it’s now at about 1.65 trillion. So we’ve obviously seen some huge amount of debt, but get a load of this. According to what I pulled off at the Federal Reserve, in the first quarter of 2000, the total amount of student loan debt was $1.54 trillion. End of the second quarter of this year is $1.65 trillion. That’s barely moved. I mean, truthfully, and that’s well less than the rate of inflation. And it suggests to me that either people aren’t buying into it any longer. I don’t know what the previous administration was doing with that and all that stuff. But if we’re not taking out more debt and fewer kids are signing up to go to college, I think it could lead to some enormous disruption in our secondary education.
Sam Clement (22:47):
Well, that’s just supply and demand sort of 101, right? If there is this theoretical unlimited money to spend on it, there’s no reason prices should not soar.
John Norris (22:57):
And that’s what happened.
Sam Clement (22:59):
Yeah. And that’s really kind of the crux of the issue, right? Is anytime there is a huge influx of dollars that can go to something, prices are going to go up. It is not unique to student loans. If you give everybody unlimited credit cards, the amount of money spent is going to go up and the demand’s going to go up and prices are going to go up. So you have to start having some of that pushback for there to be any focus on pricing, especially for student loans.
John Norris (23:26):
All right. I’m going to tell you in terms of student loans, kind of touched on it, this will definitely be a topic of discussion for another time. I think what we’re seeing here with the flat lining in student loans, I think we’re going to see a wave of small university closures or colleges over the next decade. We’ve been talking about this for a very long period of time, but I think really over the next three to five years, it’s going to begin in earnest. All right. That again, a topic for discussion another time. So with that, guys, thank you all so much for listening. We always love to hear from you all. So if you have any comments or questions, please, by all means, let us know. You can always drop us a line at , or you can leave us a review on the podcast outlet of your choice.
(24:09):
Of course, if you’re interested in reading more, hearing more of what we got to say or how we think, you can go to oakworth.com, O-A-K-W-O-R-T-H.com. Take a look underneath the thought leadership tab and find access to all kinds of exciting information, including links to previous trade and perspectives podcasts, links to our newsletter/blog common sense, links to our quarterly analysis that we lovingly call macro market, as well as links to items put out by our advisory services team. All right, Sam, anything else to say on this exciting topic today?
Sam Clement (24:39):
That’s all I’ve got.
John Norris (24:39):
That’s all I’ve got today too. Y’all take care.
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